Real Estate — Flipping: Not Gymnastics, But Lots of Exercise

'Flipping', in real estate investing lingo, is nothing more than buying a property and selling it again quickly, hopefully for a healthy profit. It's not illegal, it isn't even unethical - it's just business, and that can be done either way.

The belief that flipping is illegal, sometimes the result of media stories designed more to excite than illuminate, comes from the practice of attempting to deceptively inflate the market value of a property, falsify documents, and/or collude with others to defraud a buyer. That's definitely unethical and rightly illegal. But that's not flipping, that's plain old fraud perpetrated by plain old con men.

To flip a property, you first have to find one that's flippable. That usually involves finding either a 'fixer-upper' and 'fixing-upping' quickly for a rapid sale, or finding a buyer that's eager to sell at a bargain price.

Talk to friends and relatives, business contacts, bankers, real estate professionals, or anyone else who can give you a lead to a bargain. Sometimes, simple driving around the right areas will allow you to spot one. Look for those 'For Sale By Owner' signs or knock on doors.

Alternatively, public records sometimes contain references to 'fire sales', and - if you dig deep enough - occasionally to property owners finding it difficult to make their mortgage payments. When you find one and they agree to sell, you're getting something you want - a property that might turn a profit. They're getting something they want - relief from an unsustainable debt burden. Nothing unethical about that.

Some deals are possible that don't even require you to put your name on the title. You can 'double-escrow' a buyer who wants to remain living at the property. Double escrow involves taking a very long escrow - longer than say 90 days - and reselling the property during the escrow so that both deals close escrow on the same date. In a rapidly rising market, the buyer can then take advantage of the increase in the sale value of the property.

Always have your financing in place, if needed, and be prepared to move quickly.

You can 'flip' by entering an agreement to purchase a property, then selling the contract to another investor before close of escrow. You pocket anywhere from $500 to $5000 and don't even need to find financing.

To be successful at flipping you need to master a steep learning curve and look honestly within.

You need to learn how to spot a salable property and to learn to judge buyers. You need to learn a little about property repair, which usually involves doing some yourself. That means finding out about plumbing, carpentry, and other skills that usually aren't the first love of investors.

You need to have an active personality - flipping involves dealing with lots of details in a short span of time. It also means having or developing a high tolerance for risk. Stressed buyers aren't usually the most calm, reasonable people to strike deals with. They often have poor credit and can back out on a deal at the last minute.

You need to hone negotiation skills and develop relationships with contractors and lenders, especially the kind that can be relied on to move quickly when you need them to. You should have a trustworthy accountant and a responsive attorney, unless you already have these skills.

You need to learn a fair amount about contract and real estate law, and study the tax consequences of buying and selling properties within a short time frame.

Whew! And you thought your business was a tough racket.